Insurance rate control may not work for Hawai'i

By Frank Cho
Advertiser Staff Writer

Legislators in Hawai'i, one of only two states that does not already regulate insurance premiums, have introduced nearly a dozen bills this session to deal with the skyrocketing costs of healthcare and to make coverage more affordable and available.

	Many bills address health insurance Legislators are considering numerous bills that relate to Hawai'i's healthcare industry. Many deal with regulating health insurance rates, mandating coverages, improving competition and limiting insurers' financial reserves. Among the bills:
•	HB 1761: Gives the state's insurance commissioner the power to regulate health insurance rates and limit the reserves insurers can keep.
•	SB 2086: Would eliminate the state's Prepaid Health Care Advisory Council and allow the director of labor and industrial relations to consult with the insurance commissioner on approving healthcare plans seeking to enter the state.
•	HB 2204: Removes exemption for the state from the requirements of the Hawai'i Prepaid Health Care Act.
•	HB 2705: Repeals certain administrative aspects of the Hawai'i Prepaid Health Care Act.
•	SB 2884: Prohibits anyone representing HMOs, mutual benefit societies, or any other health organization, from being a member of the Prepaid Health Care Advisory Council.
•	HB 2835: Creates a mandated health insurance service review panel to assess social, medical and financial impacts of mandated health insurance coverage. Repeals the state auditor's duty to review such proposals.
•	SB 2302: Prohibits health insurance rates that are excessive, inadequate or unfairly discriminatory. Requires healthcare insurers to submit rate filings for approval by the insurance commissioner. Establishes penalties and appeal procedures.
•	HB 237: Creates a mandated health insurance service review panel to assess social, medical and financial impacts of mandated health insurance coverage, and recommend a cap on cost of mandated health insurance coverage in terms of percentage of average annual state wages.
•	HB 1371: Authorizes the state's insurance commissioner to approve or disapprove the rates of health insurers.

Joan Krosch, a health insurance specialist with the Idaho insurance division, clearly remembers the day in 1994 when that state's legislature passed a reform bill that would limit how much insurers could charge consumers for health coverage.

Krosch said she thought it would mean increased competition and an end to the spiraling healthcare costs that were threatening to disrupt coverage for thousands of state residents. Instead, carriers pulled out of the market, while those that stayed raised rates as much as 40 percent the following year.

"Rate regulation has not worked too well for us," said Krosch, noting that the legislation has been followed by six years of double-digit increases in health insurance costs in Idaho.

While Hawai'i's limited market size, exemption from certain federal health laws and its 1974 Prepaid Health Care Act make direct state-by-state comparisons difficult, proponents say such comparisons still can show that limited regulation tailored to Hawai'i could have a positive effect on rates. Still, opponents worry that regulation will do what it did in Idaho: drive up prices, restrict innovation, chase away competition and force companies to respond to regulators and not consumers.

The problem, some say, is that regulation of the healthcare industry has been a patchwork, varying from state to state. The result is a fragmentary system full of holes, pitting understaffed state bureaucracies against sophisticated, better-financed, healthcare companies.

"I look at this rate regulation as a short-term emergency stop-gap approach. I think the priority right now is to stabilize the market and then focus on the real cost drivers," said Rep. Kenneth Hiraki D-25th (Downtown-Ala Moana), chairman of the state House Health and Consumer Protection Committee and a sponsor of a bill that would give the state insurance commissioner oversight for rate-making by the health insurance industry.

A recent study by the American Medical Association found that nearly half of all Americans get their health coverage from the 10 largest health insurers, reducing the ability of consumers to fight rate increases.

In Hawai'i, HMSA provides coverage to half of the state's 1.2 million residents. Kaiser Permanente Hawaii covers about 20 percent of the market, with the remainder split among smaller competitors.

Besides Hawai'i, Missouri is the only other state that does not regulate healthcare premiums.

Of the 48 states that have implemented some form of rate regulation, none has repealed the legislation and many say that is a good sign of how effective it has been.

"For Kentucky, health insurance regulation has been a good thing because it ensured that costs justified the premiums consumers were being charged," said George Smell, an insurance division spokesman for Kentucky.

During the 1990s, Kentucky was one of more than a dozen states that aggressively added or expanded regulation of the healthcare industry. Kentucky officials believe that move has largely kept rate increases under control.

Smell said about 40 carriers pulled out of Kentucky and rates went up after it passed its version of rate regulation, but many carriers have since returned and rate increases are now more consistent with national insurance trends.

In Georgia, which has a long history of regulating health insurance rates, competition among a large number of carriers has helped keep rates under control.

"Rate regulation is good for consumers, and it puts some constraints on the carriers," said Carol Clark, a director of the life and health managed-care division for the state of Georgia, which has been regulating insurance for more than a decade. "But overall, it makes sure everybody plays by the rules."

Clark, however, said Hawai'i should be careful before it starts down the path of regulation.

"You gotta know what all the rules are before legislators start asking to regulate health insurance rates," Clark said. "It's a huge thing."

In Alaska, the Premera Blue Cross plan has not asked for a rate increase since 1999 when regulators there agreed to a 12 percent rate increase for small employer groups. Premera is the largest health plan in that state, with more than 50 percent of the market and the only one regulated by the Alaska Insurance Division.

"Rate regulation, as a general rule, can be effective and probably is in a noncompetitive market," said Katie Campbell, Alaska insurance division's life and health actuary. "But rate regulation can be a double-edged sword for consumers. In Washington state, Premera had to stop writing new policies when regulators there stopped approving rate increases despite rising healthcare costs."

Campbell said regulators cannot stop healthcare costs from increasing, but they can ask insurers to spread any large premium increases out over several years to soften the blow to consumers. After three years of no increases, Premera this year filed for a 25 percent rate increase that Campbell said she is still reviewing.

In Idaho, the legislature formed an insurance task force in 1999 to look at why rate regulation was not working, and loosened some restrictions the following year.

"It certainly has not helped our small group market (primarily small business employers) as much as we had hoped," said Shad Priest, administrator for the Idaho insurance division.

But supporters of rate regulation say looking the other way could be even more perilous.

In the past five years, rates have increased significantly as several Hawai'i health plan companies have closed their doors or are looking to exit the market because of mounting losses. The insurers say that prescription-drug costs, which have risen about 18 percent in the past year, and increased use of healthcare services are the primary cost drivers.

Since 1995, HMSA alone has raised its community-rated group health insurance rates 37 percent for individuals and 47 percent for families during a period of little or no inflation. Nationally, health insurance costs are expected to increase an average of 12.5 percent next year, according to the American Medical Association.

"The health insurance industry in Hawai'i is monopolistic," said Hawai'i Insurance Commissioner Wayne Metcalf. "The dominant health plans have few incentives to reduce rates or correct inefficiencies."

But would rate regulation actually lower rates for Hawai'i residents?

Some national experts think so.

"I think what tends to happen is when you shine the bright lights, insurers tend to pull back from those big rate increases they say they absolutely needed," said Dr. Timothy Flaherty, chairman of the board of trustees for the American Medical Association.

Insurers, however, argue that rate regulation would do nothing to lower healthcare costs. Instead, by forcing plans to charge artificially low rates that do not cover the cost of healthcare, regulation could end up driving plans out of business.

"When we have an economy that is not robust, it's understandably difficult to accommodate increases in healthcare costs. We acknowledge that. But we don't think regulation is necessary," said Cliff Cisco, a spokesman for HMSA.

Cisco said HMSA has lost more than $100 million over the past three years in its healthcare operations, proving that the rates it charges are not excessive. HMSA has been so concerned about the heavy push for increased healthcare regulation that it has taken the rare move of hiring an outside consultant to help its in-house staff lobby against the bill.

"This is an extremely serious issue, and we thought we could use the help," Cisco said. "You are dealing with the legislative process and that is always frustrating. Clearly, the Legislature wants to fix something, but we are not quite clear what the problem is."

Kaiser also has said it opposes rate regulation of any kind.

In reviewing the dozens of bills introduced this session that take aim at regulating Hawai'i's healthcare industry, neither the Legislature nor the governor's office seem to have a comprehensive plan to deal with the rising cost of health insurance.

"I can't figure out what we are doing here," said Sen. David Matsuura D-2nd (South Hilo, Puna), and chairman of the Senate's Health and Human Services Committee. "We seem to be in a continual crisis management."

Other than the written and oral testimony submitted by insurers, government regulators and consumer groups, no legislator involved in hearing the bills has researched the possible effect of rate regulation on the state's healthcare industry.

"Yes, perhaps it would have been nice to get all that data beforehand, but the fact is it is hard to get information when you have major institutions that are not really forthcoming with information," said Senate President Robert Bunda, D-22nd (Wahiawa, Waialua, Sunset Beach).

Bunda said that while it is likely that not every bill will pass, he is hoping their introduction will start a dialogue between government and industry.

"I think it's high time that we get some answers to some hard questions," Bunda said.

Reach Frank Cho at 525-8088, or at fcho@honoluluadvertiser.com.